Revenue Ruling

Ruling Number:19-2013-01
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Sales Tax Treatment of Home Service Contracts
Keywords:
Approval Date:04/05/2013


Body:

KANSAS DEPARTMENT OF REVENUE
OFFICE OF POLICY & RESEARCH

Revenue Ruling 19-2013-01

April 5, 2013

Sales Tax Treatment of Home Service Contracts

At the request of the National Home Service Contract Association (“NHSCA”), this revenue ruling is issued to state the proper sales tax treatment of the purchase of a “home service contract” (HSC), which is a specific type of service contract entered into between a HSC provider and a buyer or seller of existing residential property. NHSCA has represented the following information concerning HSCs:

NHSCA indicates the current practice of its members in the HSC industry is that sales tax is not charged on the price for the purchase of the HSC. When a customer contacts the HSC provider to make a claim for repair service, the HSC provider dispatches a local contractor to perform the repairs. The local contractor makes the repairs, determines the sales tax due on taxable services and includes that in the full invoice to the HSC provider. The contractor collects from the consumer the first $60-75 off the top of the full invoice as a service fee, and the invoice to the HSC provider reflects receipt of that payment. However, sales tax is billed to the HSC provider on the full invoice amount for taxable services, including the fee received from the consumer. Upon receiving payment from the provider, the local contractor then remits the applicable sales tax to the state.

Charges for service and maintenance agreements are taxable in Kansas. K.S.A. 79-3603(r) imposes sales tax on:

The sum of the taxable charges referenced in subsection (r) invoiced in a reporting period total:

and
Subsection (p) requires Kansas service providers to collect sales tax on their labor service charges for applying or installing parts or other material to tangible personal property (TPP) or to what was once TPP that has become part of real property, such as the construction materials that make up the walls and floors of a building. Subsection (p) requires service providers to collect tax on their labor service charges for repairing, servicing, altering, or maintaining a customer’s TTP or what was once TPP that has become part of the customer’s real property. Customer line-item charges for the repair parts or other TPP being installed or applied are also taxable K.S.A. 79-3603(a).

Sales tax applies to sales of materials to real-property contractors for use in their construction or repair projects on real property. A contractor is treated as the final user or consumer of those materials.

K.S.A. 79-3603(r) states that charges for service contracts are taxable if the future services contracted for are taxable under K.S.A. 79-3603(p) and (q). Under K.S.A. 79-3603(p), certain labor charges for the “original construction, restoration, remodeling, renovation, repair or replacement of a residence” are exempt. Charges for services to some built-in appliances are taxable, just as services to stand-alone appliances are taxable. Charges for services to residential fixtures, other than the built in appliances, qualify for the residential exemption and are not subject to sales tax. See EDU-28, Sales Tax Guidelines for Businesses that Sell and Service Appliances and Electronic Products (5/31/05). Requiring sales tax to be paid on the entire charge for the HSC upfront may overcharge for taxes imposed under (p), (q), and (r) when labor services provided pursuant to the HSC are exempt under (p).

The tax-compliance requirements for HSCs

The following tax compliance procedures are determined for the sale of an HSC:

(a) Sales tax is not required to be paid on the purchase charge for the HSC, because some of the covered services may not be taxable under (p) or (q). (b) Sales tax is due on the charges the service provider bills to the HSC provider for the taxable services performed for the HSC customer repair claim. HSC coverage may include repairs for residential systems or real-property fixtures (the labor charges for which would be exempt and the contractor would pay sales tax on the materials used), such as the roof, furnace and central air conditioner, as well as repairs to appliances (the parts and labor charges for which would both be taxable), such as ovens, refrigerators, or garbage disposals. (c) HSC providers are required to notify their contractors or service providers in writing that no sales tax has been paid on the charges for purchase of the HSC, and the contractor or service provider must bill the HSC provider for any sales tax due on the charges for the work performed pursuant to the HSC. Because the customer will make a repair claim under the HSC to the HSC provider, the HSC provider will contact and notify the contractor or service provider of the specific repair needed and that the contractor or service provider must bill the HSC provider for sales tax due on the services provided.

This ruling is based solely on the facts provided and replaces and supersedes all prior advice or rulings issued concerning the proper sales tax treatment of HSCs. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this ruling.

Secretary of Revenue



Nick Jordan


Date Composed: 04/08/2013 Date Modified: 04/08/2013